CASE Network Studies and Analyses 325 - Privatization and Corporate Governance in Poland: Problems and Trends

S t u d i a i A n a l i z y
S t u d i e s & A n a l y s e s
C e n t r um A n a l i z
S p o l e c z n o – E k o n omi c z n y c h
C e n t e r f o r S o c i a l
a n d E c o n omi c R e s e a r c h
3 2 5
Piotr Kozarzewski
Privatization and Corporate Governance in Poland:
Problems and Trends
W a r s a w , M a y 2 0 0 6

Studies & Analyses CASE No. 325 - Privatization and Corporate Governance in Poland…
Materials published here have a working paper character. They can be subject to further
publication. The views and opinions expressed here reflect the author(s) point of view and
not necessarily those of CASE.
The paper is based on the outcome of the following projects: “Partnership for Corporate
Governance and Secondary Privatization in Transition” funded by the USAID; “Understand-ing
Reform” funded by the Global Development Network; “Privatization, Systemic Reforms
and the Evolution of the Enterprise Sector in Poland: An Assessment of Fifteen Years’ Ex-perience”
funded by the Polish Ministry of Education and Science.
Keywords: privatization, corporate governance, transition economy, Poland.
© CASE – Center for Social and Economic Research, Warsaw 2006
2
Graphic Design: Agnieszka Natalia Bury
ISSN 1506-1701, ISBN 978-83-7178-408-8 EAN 9788371784088
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Contents
Abstract ................................................................................................................ 5
1. Privatization ..................................................................................................... 6
1.1. Intellectual and ideological context. Choosing the model ........... 6
1.2. Goals and methods of privatization ............................................... 8
1.3. Legal framework............................................................................. 10
1.4. Quantitative effects of privatization ............................................. 13
2. Corporate governance .................................................................................. 15
2.1. Intellectual background and political context ............................. 15
2.2. The legal background.................................................................... 17
3. Privatization and corporate governance ..................................................... 22
3.1. Initial conditions............................................................................. 22
3.2. Corporate governance patterns.................................................... 24
3.3. Capital market ................................................................................ 27
4. Conclusions ................................................................................................... 29
References ......................................................................................................... 31

Piotr Kozarzewski is a member of the Council of the CASE – Center for Social and Eco-nomic
Research, Warsaw, and Senior Research Fellow at the Institute of Political Studies,
Polish Academy of Sciences in Warsaw, Poland. He participated in numerous research pro-jects
focusing on transition problems, especially political economy of transformation, privati-zation,
corporate governance and enterprise sector reform in Poland and other countries of
the former Soviet block. He also has an extensive experience in advisory projects for the
governments of post-Communist countries. He is an author of more than 150 publications
and research papers, including Understanding Reform: The Case of Poland (CASE, Warsaw
2005, together with Jacek Kochanowicz and Richard Woodward) and Prywatyzacja w
państwach postkomunistycznych [Privatization in Post-Communist Countries] (ISP PAN,
Warsaw 2006).
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5
Abstract
The paper is devoted to the problems of the impact of privatization on corporate gov-ernance
formation in Poland. It discusses the dilemmas of choosing a model for privatization
and corporate governance, legal background, mechanisms of corporate governance forma-tion
depending on a privatization method applied, and the evolution of these structures in the
course of systemic transformation in Poland.
The Author comes to the conclusion that the processes of privatization and corporate
governance formation in Poland are marked by both successes and failures. The most spec-tacular
success is privatization in the “broad sense” which boosted the growth of new private
businesses and the share of the private sector in the national economy. Privatization in the
“narrow sense” (ownership transformation of state-owned enterprises) was only a partial suc-cess,
both in terms of quantity and quality. Some methods of privatization proved to be more
“permeable,” easier to implement for a number of social, political and technical reasons than
the others; thus, the progress of privatization was very uneven across sectors, and some of
them (infrastructure, extractive industries and some others) remain predominantly state-owned.
There were two reasons for this situation: the highly gradualist, consensual character
of Polish privatization procedures and the emergence of interest groups not interested in pri-vatization
of remaining state-controlled companies.
Recently, new trends are seen that can be interpreted as a certain convergence of
corporate governance models and a convergence between the effects of different privatiza-tion
methods in corporate governance and performance of enterprises. Taking this into ac-count,
the Author elaborates on whether the “how to privatize” question still actual and on the
“feasibility vs. efficiency” privatization policy dilemma.

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Foreword
The paper is devoted to the problems of the impact of privatization on corporate gov-ernance
formation in Poland. It discusses the dilemmas of choosing a model for privatization
and corporate governance, legal background, mechanisms of corporate governance forma-tion
depending on a privatization method applied, and the evolution of these structures in the
course of systemic transformation in Poland. In this paper, term “privatization” is used in a
narrow sense. It means transfer of state-owned stock into private (non-state) hands (unlike
privatization in the broad sense; i.e., development of the private sector of economy — both
through privatization of state-owned enterprises and spontaneous formation of de novo pri-vate
companies). The OECD definition of corporate governance is used: the system by which
business corporations are directed and controlled (OECD, 1999). The corporate governance
structure specifies the distribution of rights and responsibilities among different participants in
the corporation, such as the board, managers, shareholders and other stakeholders, and
spells out the rules and procedures for making decisions on corporate affairs.
1. Privatization
1.1. Intellectual and ideological context. Choosing the model
Through almost the whole period of Communist rule in Poland, serious discussions
were held on improving the efficiency of Polish enterprise sector. Unlike most other countries
of the Soviet bloc, those discussions went far beyond ideas of how to improve the central
planning system. One of the most popular approaches was that of participation of employees
in the management of state-owned firms. Apart from purely ideological justifications of such
an approach (workers as co-owners of the state property), it was believed that employee par-ticipation
would boost enterprise performance by overcoming labor alienation and by harmo-nizing
interests of employees with those of the firm and the whole national economy. Even if
some of the discussion participants had doubts as to whether state-owned enterprises with
employee participation were the most effective form of enterprise (especially compared to
privately owned companies), they believed that in the given circumstances, this was the most
radical and effective solution.
In Communist times, there were two serious efforts to introduce employee participation
in Poland. In 1956, workers’ councils were set up in state-owned enterprises, but their pow-ers
were severely limited by the unreformed centrally planned system of distribution of pro-

duction tasks among enterprises. In 1981, a deeper reform of enterprise sector started, with
employee self-management being part of a new set of decentralized principles of state-owned
enterprise operation, known as “The Three S’s” (self-management, self-financing and
self-dependence). Thus, when the Communist regime collapsed in Poland, a strong self-management
intellectual tradition existed, and groups supporting this approach had arisen
within enterprises and academia and on the political arena.
At the beginning of transformation, the attention of the first non-Communist government
was concentrated on the more obvious, and highly urgent, tasks of macroeconomic stabiliza-tion
and liberalization, subjects which were perhaps somewhat less controversial than own-ership
transformation. Here, shock therapy measures had been applied, while privatization
and institutional changes were carried out rather cautiously and gradually (in contrast to the
mass privatization procedures used later in, for example, the Russian Federation and the
Czech Republic). Maintaining a balanced budget, combating inflation and ensuring macro-economic
equilibrium as well as introducing a greater degree of economic freedom has al-ways
been included in a standard set of activities undertaken by many countries in the world
and were applied in Poland with a considerable degree of success. Yet, with respect to radi-cal
institutional changes and large-scale privatization, recourse to existing Western practices
was impossible, since there was no previous experience on this scale (the privatization of
entire economies).
At the same time, there was no consensus concerning the direction of privatization
processes among economic and political elites, in the government and between the govern-ment
and its foreign and domestic advisers. While agreeing with the main rationale for large-scale
ownership transformation (found in property rights theory, which explained the ineffi-ciency
of the socialist enterprise sector on the basis of incomplete property rights), the par-ticipants
of the discussion had different views on at least three important questions:
– What type of owner (and more generally — what type of corporate control) is the
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most efficient?
– What other goals can be met by privatization?
– What should be done to make the privatization process itself as efficient as possible?
A general debate on the privatization concept took place in late 1989 and 1990. Three
main concepts of privatization came up against each other, each providing a separate an-swer
to the aforementioned questions:
– a commercial concept of the sale of state-owned assets using classical methods, in-cluding
trade sales but most importantly public offerings (based on the British experience);
– nonequivalent privatization based on employee ownership and the US Employee
Stock Ownership Program concept and backed by the Polish labor self-management tradition;

– nonequivalent privatization through free distribution of assets among all citizens,
based on newly drafted privatization concepts (Błaszczyk, 1993; Gilejko, 1995).
In its first economic program of October 1989 (the so-called Balcerowicz Plan), the
government gave preference to the first, “classical” concept of privatization, combined with
rapid development of de novo private sector which would absorb workforce from the shrink-ing
state and ex-state sector. In turn, the privatization law, passed July 13, 1990, tried to
make use of all the three privatization concepts in order to ensure the widest possible impact
of privatization on transformation economic, social and political transformation in Poland.
Ideologically, it reflected coexistence of different views on the scope and methods of owner-ship
transformation, and more generally — on the principles of the post-Communist trans-formation
as a whole. The privatization law represents a certain combination of two main op-tions:
liberal conceptions patterned after solutions adopted in developed market economy
countries, and a participatory approach originating from the Polish labor self-management
movement and tending towards a kind of “Third Way” of development.
1.2. Goals and methods of privatization
During the whole post-Communist period, no detailed description of the main goals of
privatization was prepared. Only a few of the goals were ever officially mentioned, and most
of them had to be deduced from decisions made by the Parliament and governmental agen-cies
(Kochanowicz et al., 2005).
The economic program of the first post-Communist government addressed privatization
issues in the context of the creation of market institutions which had stood the test of time in
Western economies. Following that simple course of thought, the main privatization goal was
of a systemic character: to contribute to the change of the economic system through
creation of private entities. Within the framework of this goal, a number of sub-goals ex-isted,
of which the most important was the creation of well-functioning markets, including a
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securities market.
Apart from this purely systemic role, privatization was to solve the problem of micro-economic
inefficiency of state-owned enterprises; this would, in turn, contribute to the rise
in productivity of the whole enterprise sector.
Although never officially formulated, the third goal was of crucial importance: to make
the whole reform process smooth, stable and irreversible. Privatization was expected to
create not only incentives for economic development, but also to create powerful pro-reform
lobby of actors, involved in privatization process and using its results. Such a lobby would
exert strong pressure on decision-makers to continue pro-market reforms. The assumption
was that a critical mass must be achieved, when liberal and market institutions and actors
become stronger than the forces and institutions of the Communist past.

The fourth goal was of a fiscal nature. On the one hand, the value of the state-owned
stock designated for privatization was large, therefore the potential privatization revenues of
the budget were also significant and able to contribute to reduction of the budget deficit. On
the other hand, privatization could lift the financial burden of maintaining loss-making enter-prises
and sectors and thus contribute to reduction of fiscal deficit.
The fifth group of goals was related to the use of privatization for solving a wide set of
social problems. On the one hand, attempts were made to attain a kind of social justice (via
distribution of part of the privatized stock among the whole population and, additionally, by
creating preferences for certain groups who were felt to deserve such entitlements). Addi-tionally,
attempts were made to use privatization to resolve the social problems in concrete
enterprises by imposing on the buyers certain obligations concerning employment, wages,
environmental protection, etc.
A set of hidden goals existed as well, when the government drew public attention to
one goal while the real, most important goals were not advertised because they were less
attractive to the broad public. In some cases we can describe this as an “honest” hidden
agenda (for example, stressing the social profits from privatization in order to gain public
support and unblock or speed up the privatization process — e.g., this included preferential
treatment of insiders). Trying to build a strong coalition of pro-reform forces, the government
had to bear in mind that different coalition members might have different motivations, so it
seemed to be politically rational not to spell out the goals. Moreover, given the multiplicity of
objectives and the constraints, a detailed description of the privatization goals would have
been almost impossible.
In other cases, however, hidden goals were less “honest.” For example, they appeared
in the course of formation of entrenched interest groups which were interested in privatization
(or more often lack of privatization, e.g. in the sectors where privatization would mean dis-continuance
of public financial support), or some specific method of privatization of enter-prises
or whole branches, primarily in view of the gains they expected to reap as a result.
Members of these groups rather seldom occupied the highest positions in the government or
administration; they were influential mostly as lobbyists or voters.
The problem is that at least some of the goals may be — and in fact were — contradic-tory.
For example, pursuing the fiscal goals sometimes jeopardized the goal of increasing of
microeconomic efficiency (the more an investor must pay to the budget, the less he may in-vest
in a company). In addition, maximizing global revenues from privatization requires a
gradual approach (because glutting the market with privatization offers would reduce the
market prices of enterprises), while the tactical goal of reduction of the budget deficit in a
given year could lead to just such an attempt to maximize privatization revenues in a given
year, thus lowering the total revenues to be achieved from privatization. Excessive attention
9

to the social obligations of an investor may lead to inadequate investments in the company
(an excessively high wage bill reduces funds available for investment). The goals related to
“social justice” (e.g., “enterprises should belong to their employees” or “enterprises should
belong to the whole society”) contradict the need to find efficient owners for privatized enter-prises.
It is quite obvious that contradictions between official and hidden goals can be highly
destructive for the privatization process, especially in the case of “dishonest” goals. Their
pursuit not only leads to slowdown and distortions in the privatization process, but has severe
political consequences related to the corruption of the state apparatus, deceleration of the
construction of institutions of the market economy, and growing disappointment of population.
A set of goals on the enterprise level also existed. These were the group and individual
goals of the managers and employees of state-owned enterprises. Quite often such goals
were not in line with the privatization policy conducted by the government. This problem is of
a special importance in Poland, where insiders have very substantial impact on privatization
of “their” enterprises. At this level, too, we observe openly proclaimed and hidden goals, the
latter often connected with enfranchisement of certain enterprise actors (primarily managers).
Another important feature of Polish privatization (and the whole enterprise sector re-form)
is its gradualist, highly consensual character. Its authors were aware of a trade-off be-tween
the speed and quality of transformation processes. They believed that lower speed
resulting from careful preparation of privatization deals (both in the technical and social di-mensions)
is much more important than massive and rapid formal change of owners, be-cause
the reformed market environment would exert strong pressure on state-owned enter-prises
and force them to adapt and restructure, thus making their privatization less urgent,
although still necessary. The gradual character of Polish privatization also reflected a choice
made in the discussion of what should come first: privatization (which would create demand
for further reforms)1 or regulation and institutional constraints (in order to create a framework
for actors’ behavior and prevent tunneling).2 The gradualism reflected a choice in favor of the
latter solution. And, last but not least, consensual character of privatization procedures had to
help in overcoming the assumed resistance of insiders and other stakeholders.
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1.3. Legal framework
The main features of Polish privatization (multiplicity of goals and its low-pace consen-sual
character) were reflected in the privatization law, which envisaged a wide range of pos-sible
methods and paths of ownership transformation.
1 See Frydman and Rapaczynski (1995); Boycko, Schleifer and Vishny (1995).
2 For example, see Murrell and Wang (1993).

The main privatization act is the Act of August 30, 1996 on Commercialization and Pri-vatization
of State-owned Enterprises which came into effect only in April, 1997. Before that,
the Act of July 13, 1990 on Privatization of State-owned Enterprises had been in force. The
law distinguish two basic privatization methods: indirect and direct.
The indirect (formerly called capital) method consists of two stages. At the first stage, a
state-owned enterprise (SOE) is commercialized, i.e., it changes its legal form and is trans-formed
into a company, where 100 per cent of shares belong to the Treasury (so-called sole-shareholder
company of the Treasury, Polish acronym: JSSP), and begins to operate under
provisions of the Company Code, common to all entities (except state-owned enterprises and
a limited number of companies which are governed by special legal acts). At the second
stage, the sale of the shares takes place in a number of ways: public offering, sale to strate-gic
investor (or combination of these two) and inclusion to National Investment Fund program.
On April 30, 1993, the Act on National Investment Funds (NIF) was adopted introducing
a kind of mass privatization program which, contrary to such programs in other post-
Communist countries, had been designed not only to transfer a significant part of the state’s
sectors assets to Polish citizens, but also to create a mechanism for actively restructuring the
companies participating in mass privatization. NIFs received blocks of shares of 512 compa-nies
which undergo mass privatization, and Polish citizens received a kind of vouchers which
they could invest in the NIFs. It is worth noting, that mass character of NIF program was only
a demand side (all Polish citizens), and not on supply side, as in other countries where mass
privatization took place. The NIF program was supposed to accelerate the pace of privatiza-tion,
at the same time providing for restructuring of companies, facilitated by the experience
of the professional management companies employed by the NIFs. These goals were never
fully achieved (Błaszczyk et. al., 2001).
The direct (formerly somewhat misleadingly called liquidation) method consists of liqui-dation
of a SOE in a legal sense; then, the assets of the enterprise (in totality or divided into
separated organized parts) are privatized in one of the three possible ways (in Poland often
called “paths”):
– sale;
– entering as a contribution in kind into a company established by the Treasury and a
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private investor;
– leasing (management-employee buy-out — MEBO).
The last path needs more attention because it was very popular and is Polish contribu-tion
into methodology of post-Communist privatization. A SOE can enter this path only on the
request and with consent of insiders. A company (as a rule, LLC) with participation of em-ployees
is being set up which leases the equity of formally liquidated SOE. The company
signs a leasing contract with the Treasury. The contract provisions stipulate that upon re-

payment of all the capital installments and leasing fees the assets of the liquidated SOE will
become the property of the company.
Another method of privatization was provided by Art. 19 of the Act of September 25,
1981 on State-owned Enterprises. It applies to SOEs in financial distress — the enterprise is
liquidated and its assets are sold out. Some enterprises in agricultural sector are privatized
according to the principles provided by the Act of October 19, 1991 on Management of Agri-culture
Property of the Treasury. There are also separate acts devoted to ownership trans-formation
of certain enterprises and sectors of the economy. Recently, a number of acts have
been adopted which link privatization with sectoral restructuring.
All methods and paths of privatization are equivalent (buyers pay market price or the
price based on valuation), except the NIF program, where certificates of ownership have
been distributed among the population for a small fee.
The privatization law regulates not only the privatization process itself, but also in some
cases the initial corporate governance structure, including initial ownership distribution and
composition of corporate governance bodies. The scope and character of the impact of the
regulations depends on the privatization method applied (see also the next section). However,
the common feature is preferences for insiders, both in starting privatization, and in distribu-tion
of shares. Before the privatization act of 1996 was adopted, all privatization deals had
been initiated or had needed to be approved by the governing bodies of SOEs. In 1997, such
a requirement was lifted.
According to the 1990 Act, in indirect (capital) privatization employees had a right to
acquire 10 per cent of shares at reduced price; these preferences were increased by the
1996 Act by granting a right to insiders to acquire 15 per cent of shares for free. Another 15
per cent can be received for free by farmers and fishermen if they were suppliers of the for-mer
SOE (with restrictions regarding the volume of supplies). Besides, the new Act lifted the
requirement that JSSPs, as a transitional entity, should be privatized within 2 years after
commercialization. It introduced a legal background for impeding ownership transformation in
this group of companies.
Until 1997, the leasing path of direct privatization preferred extremely insiderized pat-terns
of ownership structure: the new company should have been founded by the majority of
employees, no institutional outsiders were permitted (unless accepted by the Ministry of
Ownership Transformation). The Act of 1996 imposes certain limits on the use of direct priva-tization
paths and the role of insiders in ownership transformation. Limits have been set on
the size of enterprises (in terms of employment level, assets and turnover); outsiders gained
a right to take initiative in privatization without prior consent of insiders; in leasing path, at
least 20 per cent of shares in the new company must be in the hands of outsiders; possibili-ties
of participation of legal persons have been increased.
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To govern the privatization processes, a brand new special structure within public ad-ministration
had do be set up. The Ministry of Ownership Transformation (reconstituted in
1996 as the Ministry of the Treasury) had to perform functions which had not existed before,
which for the reformers meant that it had to be organized in a way differing significantly from
the established culture of public administration in Poland. Moreover, its functions, as origi-nally
conceived, were limited in time (meaning that it was to be liquidated after privatization
ended). Thus the ministry had to create its patterns of behavior, internal structure etc. in a
new and uncertain environment, and be very task-oriented (not to form another interest group
interested in perpetuation of the transition period or, if the end of transition becomes inevita-ble,
adopt “end-game” behavior trying to convert its authority into another, more liquid form).
This was, moreover, the problem of all new agencies created to serve the process of post-
Communist transformation.
1.4. Quantitative effects of privatization
The most striking, and arguably most important quantitative result of the process of pri-vatization
of the Polish economy has been the creation of over 220,000 new private compa-nies
(and nearly 2.8 million private one-person and family businesses), which make up more
than 97% of all registered firms, employ 70% of the work force and are responsible for 75%
of GDP (Central Statistical Office, 2005; EBRD, 2005).
In Poland, the so-called small privatization, affecting the retail, catering and service
sectors, was conducted very rapidly: by the end of 1992, 97% of all units in these sectors had
been privatized. This was a decentralized, “grassroots” process led by thousands of local au-thorities,
virtually without any intervention from the central government.
Decentralization of initiation of privatization deals in enterprise sector and the high role
of insiders in this process, together with possibility of establishing management-employee
ownership, acted as a catalyst of privatization of SOEs. During the first years, MEBOs and
other forms of decentralized, “participatory” privatization greatly outnumbered centralized,
government-led sales of enterprises. At the same time, the overall pace of privatization of the
enterprise sector was much slower than had been anticipated. Besides, since the mid-1990s
we have witnessed a substantial slowdown of the privatization process, which occurred due
to two main reasons: the stock of “easy to privatize” (in technical, social and political terms)
enterprises was rapidly depleted, and political pressure for privatization slowdown increased
(Figure 1). There was a certain revival of both indirect and direct privatization in 2004-first
half of 2005 owing to activity of the new Minister of the Treasury which was a strong sup-porter
of pro-market reforms and private sector development. However, the prospects for ac-celeration
of privatization in Poland still remain rather dim, because the new ruling coalition
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which came to power in autumn 2005 opposes continuation of coherent market reforms in-cluding
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ownership transformation.
Figure 1
Dynamics of privatization (number of enterprises by years, 1990–2005)
500
450
400
350
300
250
200
150
100
50
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Number of enterprises
Total completed cases
"Indirect" privatization (total)
incl. completed cases (without the NIF Program)
"Direct" privatization (completed cases)
Liquidation (completed cases)
Source: Ministry of the Treasury data (http://www.msp.gov.pl).
The speed of ownership transformation depended mainly on the industry, size, organ-izational
structure and profitability of an enterprise. The privatization of small and medium-sized
enterprises (SMEs) in manufacturing, trade and construction was usually accomplished
relatively quickly (as technically and politically less complicated — more than half of them
were bought by managers and employees). The other pole was represented by the largest
enterprises, especially from infrastructural sectors, mining and metallurgy. Obstacles of a po-litical
nature started to appear as well (i.e., powerful interest groups which defended the
status quo and created pressure on the government to slow down privatization). Apart form
“re-consolidating” sectoral programs which have been adopted, the 1993 Law on the Owner-ship
Transformation of Certain SOEs of Special Importance for the National Economy was
passed, which in fact excluded a large number of enterprises from the privatization process.
Additionally, as it was said above, the 1996 Privatization Law in practice lifted the obligation
to privatize commercialized state-owned enterprises. As a result, privatization was completed
only in the case of 67% of state-owned enterprises (Błaszczyk, 2005), and in 2005, state-controlled
firms still produced about 25% of the GDP (EBRD, 2005).
Thus, the characteristic feature of Polish privatization is quite a large number of cases
of “unfinished privatization” in the form of about than 500 predominantly large companies that
were only commercialized, but never privatized (the so-called sole-shareholder company of
the Treasury, Polish acronym: JSSP), and about 100 companies where the Treasury has

stakes of more than 50% (Nawrot, 2003). Moreover, in the National Registry of Business En-tities
(REGON) there are still more than 1300 state-owned enterprises3 (out of the total num-ber
of 8453 SOEs at the beginning of transition) (Central Statistical Office 1991, 2005).
Table 1
Selected data on privatization of state-owned enterprises
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Performance (2004)
Turnover profitability
Number
of com-panies
Methods of privatization rate
(June
2005)
Total em-ployment,
thousands
(end
2004)
Cost level
indicator
gross net
“Indirect” privatization: 1573
JSSP 541 234.9 95.5 7.4 5.4
completed casesa 355 219.5 91.6 8.5 7.0
- with participation of foreign in-vestors
139 75.2 92.9 7.1 6.0
companies included in NIF Pro-gram
512 111.0 95.3 4.7 3.7
Debt conversion 17 1.9b 118.9b -18.9 -18.9
“Direct” privatization: 2135
MEBO 1364 137.5 95.3 4.7 3.5
in-kind contribution 227 44.0 87.5 12.5 10.9
other forms of “direct” privatization 544 2.5b 103.3b -3.3b -3.5b
Liquidation (completed cases) 1008
TOTAL 5673 805.3 93.3 7.6 6.0
a The share of the Treasury is less than 50%. Without the NIF program.
b In 2003.
Source: Central Statistical Office (2003, 2005), Ministry of the Treasury (2003, 2005).
2. Corporate governance
2.1. Intellectual background and political context
At the microeconomic level, one of the main tasks of privatization was the building of
efficient corporate governance mechanisms that would help to overcome the governance
problems which in Communist times were one of the main obstacles to raising the efficiency
and productivity of the enterprise sector.
The choice of the right corporate governance model was not an easy task, however.
First, there was a question what corporate governance model would be the best for the
Polish enterprise sector. In developed market economies, two main models existed (Anglo-
Saxon and Continental) that reflected different philosophies of corporate governance, espe-cially
in the field of corporate control mechanisms and company mission.
3 However, the real number of still existing SOEs may be lower, because of problems with up-dating
the registry.

Pragmatically speaking, the Continental model was more suitable for Poland (as well
as other post-Communist countries) for a number of reasons:
– the influence of external control (in the form of commodity, financial, take-over and
other markets) did not exist or was not sufficiently effective. In such conditions, the efficient
functioning of internal supervision was of fundamental importance;
– the investment potential of the Polish population was weak, therefore the main
sources of capital had to be looked for elsewhere. The Continental model assumed the sig-nificant
role of a strategic investor, in Polish circumstances — most likely foreign (and, later,
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also domestic industrial and institutional);
– both the managerial skills and technical assets of Polish enterprises were archaic and
not adapted to the new challenges of the emerging market environment. Strategic investors,
especially foreign ones, were able to bring to a company not only capital, but also a new cul-ture
of management, of company behavior towards its environment, new technology etc.
Second, the corporate governance model was expected not only to meet enterprises’
needs (i.e., their efficient operation), but also serve the transition in Poland in general, being
a part of the new political, social and economic model. Therefore, the choice of a model de-pended
on social and political considerations as well. Here, the choice between Anglo-Saxon
and Continental model was not so obvious, because the Anglo-Saxon idea of shareholder
value suited the ideas of mass enfranchisement of population. On the other hand, the Conti-nental
model was of a more participatory character, which suited the advocates of employee
self-management and participation.
Third, unlike green-field companies, privatized enterprises did not emerge out of the
blue. They represent a continuation (in economic, organizational, social and other ways) of
the former SOE. The “legacy” of SOEs has several aspects, including the following:
– the state-owned enterprise had its own organizational structure, with each body hav-ing
its own competencies to which all actors had become accustomed;
– in most state-owned enterprises, stable structures of power and influence had been
established, and many insider actors were afraid of losing them after privatization;
– the mentality and behavior of the main insider actors were to a great extent deter-mined
by their previous experience in the state-owned enterprise.
Here, a real threat was that entrenched insiders would resist any attempt to change the
internal status quo. Therefore, there was a popular view that strong owner control must be
imposed, while taking insiders’ concerns into account. Under such circumstances, the Conti-nental
model seemed to be a good solution (Jarosz, Kozarzewski, 2002; Kozarzewski, 2006).

17
2.2. The legal background
So, in general, the Continental model of corporate governance was chosen, with slight
inconsistencies and alterations caused by ideological and political considerations, as well as
pressure exerted by the main actors on the Polish corporate governance scene. It is worth
noting, however, that Polish policy-makers, as well as their colleagues in other transition
countries, were under strong intellectual pressure of Anglo-Saxon economic theories and lit-erature,
which led to attempts to introduce from the very beginning some elements of capital
market-based relations and institutions as well. Therefore, Polish legislation included possi-bilities
for development of Anglo-Saxon corporate governance solutions, e.g., by introducing
sound and transparent regulations of the organized capital market and creating conditions for
its development (e.g., with the help of initial public offerings of privatized enterprises, and,
later, by introducing new players on the stock exchange).
The main act which regulates corporate governance relations at a company level is the
Company Code of September 15, 2000 (enacted on January 1, 2001). It replaces the Com-mercial
Code of June 27, 1934.
On a company level, it introduces two-tier system with separate executive and supervi-sory
boards. Supervisory boards are compulsory in all JSCs and large LLCs. As a rule, su-pervisory
board members are elected at the shareholders’ meeting (group voting is possible).
In most cases, supervisory board appoints the members of the executive board (in general,
the supervisory board’s position vis-à-vis executive board has been strengthened in the new
Code). Formally, supervisory board has a wide range of powers, especially controlling ones,
as a safeguard against opportunism of managers. It supervises all spheres of the company’s
functioning and has a right to study all documentation and to receive all necessary informa-tion
not only from executive board members, but also from every employee in the company.
Supervisory board’s powers can be fine-tuned in order to reflect the needs of corporate gov-ernance
in a specific company.
Notwithstanding its basically Continental character, in most cases Polish legislation
does not take the concerns of stakeholders into account in corporate governance structures.
For example, there is no requirement to include representatives of stakeholders (e.g., em-ployees)
into the supervisory board. However, the surveys show that in many privatized
companies stakeholders (first of all managers and employees) are represented in this body
as a part of personnel policy of core shareholders.
Another peculiarity of the Polish legal system is that the main vehicle for representation
of stakeholder interests is privatization legislation, rather than regulations affecting the enter-

prise sector in general. Thus, there are fundamental differences in the corporate governance
regime depending on whether an enterprise originated in the state sector or the de novo pri-vate
sector — a situation which is, to our knowledge, not found in any other European coun-try.
Apart from above-mentioned insider-dependent originating of privatization cases and es-tablishing
preferences for insiders and some suppliers in acquiring shares, privatization legis-lation
introduces legal support for stakeholder interests in corporate governance bodies. In
both cases theses are insiders’ interests in privatized enterprises:
– in the course of indirect privatization, when employees of the former SOE and some
categories of suppliers are granted an option for free shares, and employees have a right to
appoint 40 per cent of members of the supervisory board as long as the Treasury remains
the sole shareholder;
– in the companies that have been privatized through commercialization and are em-ploying
more than 500 persons, employees elect one member of the Executive Board. This
provision is very unclear. For example, it is not known for what period after privatization em-ployees
18
have such a right.
Notwithstanding these shortcomings, the polish legal background for corporate govern-ance
can be assessed as good, with strong disclosure and transparency requirements and
protection from abuse.
The Commercial Code contains a system of safeguards against minority shareholders
abuse. Shareholder has a right to appeal against a decision of the shareholder’s meeting if
such a decision violates the company charter, good practices or the company’s concern. By
the way, such a right belongs to executive and supervisory boards’ members as well. Minor-ity
shareholders have extended rights for group voting. There are three types of preferential
shares:
– privileged shares, giving their holders greater than one and no more than 2 voices
per share (till the end of 2004, the Treasury can have up to 5 voices per share);
– golden share;
– non-voting share (since 2001).
A voting cap can be introduced for shareholders that possess more than 20 per cent of
voices. On the other hand, most important decisions should be approved by qualified majority
of voices on the shareholders’ meeting (2/3 to 3/4). There are provisions against collusion of
shareholders. Every member of the supervisory board and a shareholder who possess at
least 10 per cent of shares has a right to call an extraordinary shareholders’ meeting.
The Act of January 21, 1997 on Public Securities Trading and the new Act of July 29,
2005 on Financial Instruments Trading that the replaced the previous law, grants a share-holder
or a group of shareholders that possess at least 5 per cent of votes a right to appoint a
special controller whose task is to investigate a concrete problem of the company’s function-

ing. The same act imposes on a strategic investor an obligation of mandatory bid if he pos-sesses
more than 50 per cent of votes. Such a bid must be also announced when someone
is going to buy more than 10 per cent of shares. There is a system of safeguards which is
intended to ensure proper prices for sellers of shares. In publicly listed companies, an inves-tor
must obtain a permission of The Securities and Exchange Commission to pass a thresh-old
of 25 per cent, 33 per cent, and 50 per cent of voices. All blocks of shares which give
their owners at least 5 per cent of voices must be registered.
One of the most important means of preserving shareholders rights vis-à-vis managers
and large shareholders are information and disclosure requirements. The rights of the super-visory
board were mentioned above. The Company Code grants a right for any shareholder
to ask the executive board for information that is necessary for evaluation of topics discussed
at the shareholders’ meeting. According to the Act of September 29, 1994 on Accounting,
financial statements of companies must include information on remuneration of top managers
and supervisory board members, as well as on any loan they may receive from the company.
Information must be provided about capital groups (other companies in which the company
possess at least 20 per cent of shares). The Act on Public Securities Trading provides pub-licly
listed companies with additional requirements regarding informational transparency.
These companies have to publish all information which may influence the price of shares.
There are special disclosure provisions devoted to selling and buying shares by major share-holders.
It should be noted, that most of the regulations mentioned in the last two paragraphs
19
apply only to publicly listed companies.
On the other hand, there are provisions of the Polish law which are intended to with-stand
the misuse of the above-mentioned safeguards. When a shareholder starts a legal ac-tion
against a decision of the shareholders’ meeting, this does not stops its execution; in case
if the court decides that the protest is groundless, the suer has to pay a penalty up to ten
times of the cost of the court examination. A company has a right to deny a shareholder an
access to some data if it would cause damage to the company.
Not all problems related to managing conflict of interests of members of the executive
board, supervisory board, and shareholders are handled in a proper way. The law covers
problems of personal capital links with other firms and responsibility towards the company. At
the same time, there is no legal requirement to include independent members in supervisory
boards, although such a provision can be found in charter of a few Polish companies. The
Warsaw Stock Exchange has recently introduced a “soft” requirement for listed companies to
include before the end of 2004 at least 50 per cent of independent members to their Supervi-sory
Boards (see below).
There is another sphere where conflict of interests is not properly managed. Although
auditor has to be independent from the audited company (do not possess shares, not to be

the company’s attorney, etc.), there is no legal prohibition for an auditor to be simultaneously
a consultant for the same firm. Moreover, if such an auditor provides bookkeeping for a firm,
he still can perform audit (except for those part of financial documents which has been pre-pared
by himself). Lack of proper regulations in this sphere is potentially very dangerous,
which is confirmed by the bookkeeping scandals in the USA.
In practice, in Poland there are a lot of cases both of abuse majority and minority rights,
as well as of managers’ opportunism. There are three main causes which make those viola-tions
possible (Tamowicz, DzierŜanowski, 2002; Kozarzewski, 2003):
– the problems of corporate governance formation in Poland. As a result of consensual
privatization, dispersed and highly insiderized patterns of ownership structure often emerged
with strong positions of managers and to some extent non-managerial employees. A wide-spread
weak role of supervisory boards in the corporate governance system is reported in
the surveys, executive boards often being the most influential body (this situation is jokingly
called “Vistula model” of corporate governance,4 as opposed to Continental and Anglo-Saxon
models). That hampers the effective control of shareholders over managers and outsiders
over insiders (given generally still weak outsider investorship in Poland). As a result there are
problems with overcoming the “legacy of Socialism” in former state-owned enterprises with
very strong position of managers most of them being directors before privatization. On the
other hand, if a company is sold to outsiders, highly concentrated pattern of ownership struc-ture
emerges which makes possible minority abuses. High role of the Treasury in many firms
which are undergoing indirect privatization is also important;
– the inadequate law. First, the law that describes corporate governance structures in
companies is not instructive enough, too often giving general idea and principles rather than
concrete solutions. Second, the system of rights and safeguards that regulates corporate
governance relations within companies is not extremely efficient. For example, minority inter-ests
can be (and sometimes are) abused with the help of anti-collusion provisions. Disclosure
requirements do not cover all cases of gaining control over a firm with the help of affiliated
and subordinated companies. There are situations when mandatory bids can be avoided
without breaking the law. Prevention of hostile takeovers by outsiders is also possible. Ma-nipulations
of the dates of shareholders’ meetings are widespread. Managers have legal
possibilities of profits stripping and tunneling. Disclosure provisions are often regarded as
very complicated and there is a widespread opinion among managers, that some of them are
impracticable. Third, legal acts sometimes contradict each other and overlap;
4 The term was coined by Krzysztof Lis, Chairman of the Polish Privatisation Agency at the be-ginning
of transformation
20

– poor enforcement of the law. Nor the courts, neither the prosecutors have sufficient
capacities or skills to cope with cases of illegal actions in companies. Within the Warsaw Ter-ritorial
Public Prosecutor’s Office a department of capital market offences has been estab-lished,
but positive results are still hard to be seen. Fiscal administration is incapable to cope
21
with transfer pricing.
In recent years, attempts have been made to strengthen corporate governance by
elaborating and introducing best practices of corporate governance. The main idea behind
this approach is that because legal regulations themselves are incapable of dealing with all
the problems of corporate governance, a set of principles should be prepared which would
both serve as instruction on how to behave correctly and as a form of moral pressure on
companies to introduce these principles. In Poland, two teams prepared their own best prac-tices
codes: the Polish Corporate Governance Forum affiliated with the Gdansk Institute for
Market Economics, and Corporate Governance Forum affiliated with the Institute for Busi-ness
Development. The idea of the first project was rather to explain the idea and main prin-ciples
of proper corporate governance practice, whereas the second one was aimed more at
giving concrete suggestions how corporate governance bodies within a company should be-have,
what decisions they are to make, etc.
In 2002, the Warsaw Stock Exchange has introduced “comply or explain” provision by
adopting the Best Practices Code for listed companies (updated in 2005), based on the sec-ond
project, but also using some ideas from the first one. As a result, the Code became less
concrete and instructive, but at the same time tried to show some general ideas of good cor-porate
behavior. The Code includes a few concrete provisions absent in Polish company law:
– at least 50 per cent of supervisory board members should be independent (they are
granted extended rights);
– management remuneration must be disclosed in detail;
– decisions of the general assembly of shareholders must be formulated in a way which
makes it possible to sue them;
– auditors must be changed at least every five years;
– the special controller must be fully independent;
– when a company buys back its own shares, all shareholders must have equal rights
to sell their shares.
Other provisions seem to be too general and declarative and therefore not enforceable
in practice. Beginning July 1, 2003, all listed companies had to report whether they complied
with the provisions of the Code, and if not, what specific provisions were not introduced and
why. But in fact even the above mentioned concrete provisions will hardly be enforced in a
majority number of companies, because there is no effective punishment for not introducing
those measures into companies’ charters and everyday behavior. At most, the WSE can pub-

lish a list of companies which do not comply with the best practices regulations. Therefore,
this document is rather a kind of moral obligation imposed on companies, than a strict regula-tion.
However, more and more listed companies at least verbally declare their willingness to
play “the best practices game.” Compliance (at least formal) to the provisions of the Code is
also improving. By the end of 2005, only 8 companies out of 254 declared that they were not
going to comply the Code. The number of companies that declared compliance to all the
principles increased from 3 in 2003 to 36 in 2005. The most common problem was the princi-ple
of at least 50% independent members on the supervisory board. Only 54 companies de-clared
compliance with this principle in 2005 (which is still a great progress comparing to 3
companies in 2003).5 As we can see, there is still a long way to go.
Attempts are being made to introduce best corporate governance practices also in the
state-controlled sector of enterprises. In 2004, the Ministry of the Treasury approved Princi-ples
of Ownership Supervision over Companies with State Treasury Shareholdings and
Other State Legal Persons. While applying being obligatory in SOEs supervised by the Minis-try
of the Treasury, they can only serve as suggestions in the companies owned by sub-national
governments and in the firms with mixed state-private ownership. The principles are
primarily directed at state-designated supervisory board members, and serve as compendia
on the fundamentals of the company law provisions. In 2005, the revised principles were ap-proved.
On the one hand, they include some improvements, e.g., increased autonomy of the
state-designated supervisory boards and establishing a duty for supervisory board members
to monitor the use the state aid by the SOE, as well as data on the economic performance of
the company and the compliance of the company with the set economic performance targets.
On the other hand, several steps back were taken, e.g., in the field of monitoring the supervi-sory
boards and setting a standard of transparency for SOEs comparable to the level of dis-closure
of listed companies (World Bank, 2005).
3. Privatization and corporate governance
22
3.1. Initial conditions
The heterogeneous character of Polish privatization led to heterogeneity of emerging
types of ownership structure. Indirect (capital) privatization included mostly large SOEs, in
relatively good economic and financial condition, and in sectors whose privatization was po-litically
uncontroversial. In the “mainstream” indirect privatization, strategic investors were
preferred; minority blocks of shares were distributed among employees and other small
5 The Warsaw Stock Exchange data, http://www.gpw.pl.

shareholders. However, one should remember, that a significant number of enterprises (541
in June 2005) failed to privatize after commercialization and the Treasury remains their sole
shareholder (comparing with 355 companies where indirect privatization has been com-pleted).
In the NIF program, most companies are medium-sized (100-500 employees); the main
blocks of shares were distributed among 15 investment funds (one, the so-called leading
fund, received 33 per cent of shares, others received 1,93 per cent each); the Treasury was
the second largest shareholder, keeping 25 per cent of shares, and employees received the
remaining 15 per cent.
Direct privatization as a whole included mostly small and medium-sized enterprises,
even before maximum size of SOEs was imposed in 1997. There is also a significant differ-entiation
within the direct method of privatization:
– direct sale mostly covered rather small firms which could be easily sold to a new
owner. At the same time, a modification of this “path,” called “the fast track,” covered enter-prises
in economic distress, and the buyer had to pay off the firm’s debts. In both cases, as a
rule, an enterprise was sold to one person, so concentrated patterns of ownership were pre-ferred;
– on the contribution in kind “path,” the were no clear preferences for a specific type of
enterprise; however, the importance of this path is very small (only 9.7 per cent of all direct
privatization cases);
– for leasing (MEBOs) a specific category of SOEs suited more: rather small or me-dium-
sized (in order to be affordable for employees), and in rather good economic and finan-cial
condition (in order to produce enough profit to pay leasing fees and do not need immedi-ate
investments). Legal requirements predestined highly insiderized and to a large extent
23
dispersed ownership structure.
The second factor that strongly influenced the post-privatization processes was to a
greater or lesser extent “artificial” character of initial ownership structure in a majority of
companies, set by the privatization method or “path” applied and/or other administrative deci-sions.
As a consequence, after privatization, widespread adaptive processes were set in mo-tion.
In terms of ownership structure, two main processes were seen: towards concentration
and towards outsiderization, i.e., transfer of shares from insiders to outsiders. Later on, these
processes of property transfer from one category of owners to another slowed down; at the
same time, transfers within the same shareholder category intensified (e.g., among industrial
investors). The processes of concentration and outsiderization did not led to a high degree of
unification of ownership structure; we witness rather more or less strong path dependence,
the impact of “privatization history” of a company on the way its ownership, corporate gov-ernance
and behavior patterns were forming (Kozarzewski 2003).

3.2. Corporate governance patterns
Among emerging corporate governance patterns, at least three deserve special atten-tion,
all of them formally staying within the Continental model.
The first pattern is represented by the largest companies which went through “indirect”
privatization and have concentrated ownership structures, often dominated by foreign inves-tors.
In the sector of former SOEs, they are unquestionable leaders in post-privatization re-structuring
and creation of highly efficient corporate governance structures and behavior.
The ownership structure of this group of companies is highly concentrated (and the
concentration level is still growing), and insiders’ participation is very limited, unlike in privat-ized
SMEs and in spite of the pro-insider provisions of Polish privatization law (half-price and
free shares for employees in the case of indirect privatization).
In most such companies, deep changes in corporate governance structures have been
introduced, and the “legacy” of the state-owned past has already been overcome (Kozar-zewski,
2002). Thus, the processes of post-communist corporate governance transformation
are complete. However, changes in corporate control mechanisms appear to be conditional
on the characteristics of the controlling shareholder(s). The companies with the highest levels
of ownership concentration, especially those dominated by foreign investors, have more co-herent
corporate governance structures. In the companies with the lowest levels of owner-ship
concentration, the shareholders’ majority is often rather formal and does not ensure full
24
real control over the company.
Within the pattern in question, companies with foreign investor domination deserve
special attention. Corporate governance structures in most of these companies are very
transparent with clear division of powers among the executive board, supervisory board, and
general assembly of shareholders. At the same time, the foreign investor keeps tight and ef-ficient
control over the firm. An important feature of corporate governance policy in such
companies is the introduction of incentives for insiders (primarily managers), in the form of
small blocks of shares and/or seats on the supervisory board. In this group of companies, we
observe the deepest strategic restructuring, involving large investments and innovative tech-nological
changes, which leads to the high economic performance.
During the last few years, however, the gap between domestic- and foreign-controlled
companies is shrinking. Now, domestic industrial investors in terms of competitiveness and
innovation do not substantially differ from foreign investors (Woodward et al., 2005). It seems
that foreign investors should not be blamed for that. This is a result of strengthening of the
domestic industrial investors who learned how to manage their property in efficient way.
The second pattern is found in MEBO companies. Most of them used the leasing path
of direct privatization, although a significant number of such companies emerged as a result
of direct sale and even “indirect” privatization. There were two main trends of ownership

transformation there: towards concentration of shares and toward their “outsiderization.”
These processes had varying intensity in different groups of companies, and three patterns
of ownership structure have emerged:
– management-employee pattern (large blocks of shares in the hands of managers, the
rest dispersed among non-managerial employees);
– dispersed insider ownership;
– ownership concentrated in the hands of an outside investor.
The most important factor that influenced the direction and dynamics of ownership
changes was the economic performance of the company, which favors concentration and
“outsiderization” of ownership when very poor or very good. In the former case, this can be
seen as a trade-off between the power of insiders and the firm’s chances for continued exis-tence.
In the latter case, it reflects the opportunity of insiders to reap significant gains by sell-ing
their shares to outside investors. By the end of the 1990s, the post-privatization proc-esses
of property redistribution have been completed in most MEBO companies, and now
only minor changes can be seen (Kozarzewski, Woodward, 2003).
Compared with enterprises that have been privatized through indirect methods, corpo-rate
governance structures in MEBO companies seem to be to a great extent dysfunctional.
A problematic division of powers and functions can be seen in many companies, which is
caused by unclear principal-agent relations.
Besides, MEBO companies are characterized by a very high inertia of the authority and
influence structures which emerged already during the Communist period. Reproduction of
the managerial elites in these companies (especially with respect to SOE directors and the
executive boards of the privatized companies) as a rule takes the form of internal “direct re-production”
(Wasilewski, Wnuk-Lipinski, 1995); i.e., one that does not entail shifts of individu-als
25
within the hierarchy of authority.
In fact, initially most of these companies had not enough incentives nor capabilities to
introduce deep changes in their structures and behavior. Most of them were viable profitable
small and medium-size enterprises at the beginning of privatization, many of them already
having their niches on the emerging market. This situation made immediate restructuring
measures less urgent, so many companies limited their efforts to shallow and simple restruc-turing
measures, taking additionally into account, that they didn’t have enough capital. A real
motivation for deep restructuring appeared only when there was a real threat to the com-pany’s
further existence. During the better part of the 1990s, this led to a gradually falling (al-beit
still favorable) trend in MEBO companies’ economic indices, in contrast to the rising
trend in companies privatized through sales to strategic (especially foreign) investors. By the
end of the decade however, a large number of MEBO companies seemed to realize that lack
of restructuring measures might jeopardize their future, and tried to change their behavior,

i.e., to start investment programs and deep strategic restructuring. Since then we witness
steady improvement in their performance.
As to the ideological underpinnings of this path of privatization, it turned out that claims
regarding workers’ aspirations for employee participation had been exaggerated. As a rule,
they did not express a desire to participate in management of their firms, and shares with no
dividends were as a rule of no use for them (Kozarzewski, 1999). The main motivation for
workers to retain shares was the fear of unwelcome changes that an external investor might
cause (lay-offs, worsening labor conditions, etc). The popular idea of capitalism based on
employee ownership collapsed, but this collapse gave room for the development of corporate
governance mechanisms based on clearly defined property rights and a strict separation of
between ownership, supervisory and managerial functions.
The third pattern is represented by JSSPs, companies wholly owned by the state. Ini-tially,
JSSPs were intended to be a transition entity between the SOE and a private company
(with this stage lasting no longer than two years). However, in practice, for every third enter-prise
which entered “indirect” privatization, ownership transformation stopped at this stage
indefinitely. At the beginning, the main cause for this delay were problems with entering the
next stage of privatization: technical difficulties related to restructuring and preparing a priva-tization
deal, lack of appropriate buyers, etc. Later on, however, strong lobbies emerged
which were interested in keeping enterprises in this intermediate stage. These included man-agers
who were interested in keeping public support of their companies, and trade unions
and other organized groups of employees who were not interested in privatization because it
would lead to deep restructuring followed by shutdowns of loss-making enterprises, lay-offs,
and liquidation of branch privileges. A separate category of insiders not interested in future
privatization consisted of the Treasury representatives on the supervisory boards. For them,
privatization meant the loss of their positions. Simultaneously, after a significant slowdown of
the entire reform process in Poland beginning in 1992, and increase in clientelist behavior of
the political elite, JSSPs began to be regarded as a significant asset in the hands of politi-cians
and governmental bureaucracy. The Ministry of Ownership Transformation (and, later,
the Ministry of the Treasury) proved to be to a large extent incapable of staying within the
boundaries of a task-oriented organization set up for organizing the process of transition. It
suffered a growing conflict between its owner’s and seller’s functions: the fewer assets under
control of the ministry, the less its political weight. This attitude was strengthened by winning
political parties, which started to treat state assets as spoils that belong to the victors. One of
the most attractive parts of this “loot” were the seats on the supervisory boards of the JSSPs,
and for a long period of time the Ministry used them as an instrument of preserving its politi-cal
importance and stability regardless of the changes of governments (Błaszczyk 2005;
26

Jarosz, 2001). Thus, the Ministry became one of the interest groups working to slow down
the reforms.
Although JSSPs are regarded as a highly valuable asset in political struggles, at the
enterprise level the role of the Ministry of the Treasury as an owner is in most cases ex-tremely
weak: the real priority is to keep this property and extract material gains from this
possession, and not to manage it in a microeconomically efficient way. It is therefore not sur-prising
that in terms of corporate governance and enterprise performance JSSPs have be-come
the most dysfunctional group of companies included in the privatization process (Ko-zarzewski,
2005). Most JSSPs were for a long period of time left in an intermediate state, be-ing
neither a “regular” SOE nor a private company, without any concrete prospects or priori-ties
for further ownership transformation, restructuring, etc. Therefore, in practice, existing
corporate governance structures are characterized by a high degree of influence of manag-ers
and trade unions and the very weak role of the representatives of the Treasury. Addition-ally,
in many JSSPs the spheres of influence of the main actors have not stabilized, which
gives ground for perpetual conflicts (Kozarzewski, 2003a).
Notwithstanding generally negative assessment of corporate governance and perform-ance
in the state-controlled sector, in 2004-2005 some positive trends were seen. First of all,
there was a significant increase in sales and cost reduction, mainly in coal mining and metal-lurgy.
Some of these positive trends can be attributed to changes in the Ministry of the
Treasury policy aimed, among others, at strengthening its owner’s role and restructuring ef-forts
in the state-controlled sector. This policy included closing down loss-making SOEs and
initiating bankruptcy procedures it the case of a number insolvent companies controlled by
the Treasury. It improved performance of the state enterprise sector as a whole, although
hasn’t raised performance of individual enterprises. Another important factor was increased
state support for some sectors that were regarded as “sensitive” socially and politically, e.g.,
coal mining. Last but not least, favorable changes in the world markets took place: there was
growing demand for products produced mainly by the state-controlled sector in Poland: en-ergy
resources (fuels and coal), ferrous and non-ferrous metals (Błaszczyk, 2005). Therefore,
only a minor part of the observed performance improvement can be attributed to the better
governance; besides, its sustainability is very weak because of high dependence on the
situation on the world markets.
27
3.3. Capital market
Institutionalized market is strictly regulated by the Act on Public Securities Trading and
represented by the Warsaw Stock Exchange (WSE). There is popular opinion, that in terms
of organization and enforcement, the WSE is probably the best stock exchange in post-
Communist countries.

However, the list of flaws in Polish organized securities market is still rather long.
This market is highly concentrated. Large enterprises dominate, there are very few
middle-sized and small companies. Main players are also big, first of all institutional investors;
small individual investors are numerous, but very weak; their share on the stock market is
steadily declining (from 50 per cent of total turnover of shares in 2000 to 28 per cent in
2003).6 Therefore the concern of small individual investors maybe is not abused, but simply
ignored.
The WSE was established mainly to serve initial public offerings in the course of indi-rect
privatization. It is still dominated by privatized sector: more than a half companies listed
are former state-owned enterprises. The largest ones are those which have been privatized
by indirect method through initial public offering. Domination of privatized enterprises become
a barrier for further development of the WSE, because the main task of indirect privatization
was to find strategic investors for SOEe, and such investors were not interested in keeping
the companies public, at least at that stage of development of markets. In many cases, they
were forced to do it by the provisions of privatization contracts; very often only small part of
shares was on the market. Slowing pace of privatization contributed to further fall on the sup-ply
28
side.
During the first decade of its existence, the WSE was not able to gain equilibrium of
demand and supply. At the beginning, there was huge supply of shares of larges privatized
companies. Later, the situation has changed: new players were entering the market which
produced additional demand (e.g., pension funds), and there was not enough supply of stock
for them. As a result, the WSE represented very small market which has a tendency to shrink.
Overall capitalization of the WSE was rather low (15 per cent GDP) and showed falling trend.
At the beginning of the new century, the turnover of the WSE on the cash market was shrink-ing
at a pace of over 20 per cent a year. There were virtually no new entries, and some com-panies
were exiting the market. The total number of companies listed was falling (from 230
by the end of 2001 to 216 by the end of 2002 and 203 by the end of 2003). Thus, the WSE
did not properly perform two basic functions of a stock exchange: valuation and a source of
capital for private sector. The irony is that the Treasury was the largest beneficiary of capital
inflow through the WSE.
Fortunately, negative trends reversed in 2004. The WSE started to grow both in terms
of turnover and number of companies listed. This happened due to both increased privatiza-tion
activity of the new Minister of the Treasury, who previously was a Chairman of the Secu-rities
and Exchange Commission and favored initial public offerings, and to increased de-mand
of private companies for resources obtainable on the stock market. What is important,
6 The Warsaw Stock Exchange data, http://www.gpw.pl.

this time the WSE expansion was based not only on privatization deals, but also on de novo
private companies. By the end of 2004, there were already 230 listed companies, and 254 by
the end of 2005. Besides, it is worth noting that the growth was achieved without any relaxing
of regulations, but to a large extent due to development of market economy which finally cre-ated
both demand and supply of securities at a relatively high level.
29
4. Conclusions
The processes of privatization and corporate governance formation are marked by both
successes and failures. The most spectacular success is privatization in the “broad sense”
which boosted the growth of new private businesses and the share of the private sector in
the national economy. Privatization in the “narrow sense” (ownership transformation of state-owned
enterprises) was only a partial success, both in terms of quantity and quality. Some
methods of privatization proved to be more “permeable,” easier to implement for a number of
social, political and technical reasons than the others; thus, the progress of privatization was
very uneven across sectors, and some of them (infrastructure, extractive industries and some
others) remain predominantly state-owned. There were two reasons for this situation: the
highly gradualist, consensual character of Polish privatization procedures and the emergence
of interest groups not interested in privatization of remaining state-controlled companies.
Polish privatization and corporate governance legislation is very extensive and covers
all important spheres of ownership transformation, as well as companies’ and capital mar-ket’s
functioning. It created rather strong legal grounds for corporate governance and crea-tion
of sound capital market. However, in practice, the real corporate governance mecha-nisms
often proved to be inefficient. Minority shareholders abuse is quite common, but at the
same time legal provisions aimed at minority protection are sometimes used for “majority
abuse” by minorities that represent powerful industrial interests. There are also numerous
cases of managers’ opportunism, asset stripping and tunneling. External corporate govern-ance
mechanisms are often weak and do not always ensure effective regulation of compa-nies’
behavior. First of all, the growing but still weak and shallow capital market must be men-tioned.
It seems that there are the following causes of dysfunction in privatization and corpo-rate
governance spheres:
– lack of coherent concept of ownership transformation and development of private
property relations. Some very important issues of interrelations between privatization and de-sired
corporate governance models and mechanisms are still unresolved;

– contradictions in the policy of the state (especially concerning securities market, ex-ternal
institutional investors, and the role of insiders), clientelism;
– not fully adequate legislation: at the same time, overregulated, underregulated and
misregulated; lack of integrity which hampers meeting the goals of transformation. Some
provisions of the law have political character and are intended to gain support of various ac-tors.
Sometimes, provisions of law are too general and are not instructive enough;
– poor enforcement of the law and other regulations.
Privatization in Poland is characterized by high diversification of methods and has
mainly consensual character. SOEs with different characteristics were designated to various
methods and “paths,” which introduced a strong selection bias, exerted a heavy impact on
initial ownership structure of privatized enterprises, and on post-privatization processes as
well, including formation of corporate governance. Formally staying within the boundaries of
the Continental model, it was highly diversified.
Recently, new trends are seen that can be interpreted as a certain convergence with
the Anglo-Saxon corporate governance model. The development of markets, especially fi-nancial
and managers’ ones, created ground for a new type of core investors, whose strategy
is based mainly on the market value of a company rather than some other forms of return on
investment or based on pursuing some other goals. In 1990s, the popular strategy was con-centration
of capital in one hands and, if a company was listed, initiation of delisting proce-dure.
Now, more and more investors treat stock market seriously and take it into account in
their strategies. Increased supply of securities without compromising its quality for sure help
these investors to realize their plans and contributes to the creation of the “virtuous circle” of
capital market development.
A certain type of convergence can be seen between the effects of different privatization
methods in corporate governance and performance as well. A lot of enterprises that has
been privatized with the help of methods which are widely regarded as less efficient, in the
course of the recent years are showing significant improvement in performance that occurs
manly due to internal factors, i.e., better governance. At the same time, the gap between the
privatized and the state-controlled enterprise sectors is still growing, although the latter
shows some signs of performance improvement. However, this improvement is not based on
a steady grounds and is not expected to be sustainable.
Is therefore the “how to privatize” question still actual? Does it make sense to promote
privatization methods that ensure rapid formation of efficient corporate governance structures
taking into account the fact that in a long run, market forces would force deep improvements
in companies where privatization methods were not able to create an efficient owner and effi-cient
strategies immediately, but were much more feasible politically, socially, technically, etc.?
30

There is no simple answer to this question and the problem needs further investigation.
At this moment it can be said that any privatization in most cases proves to be better than
none. Therefore, less microeconomically efficient method of privatization may be applied
when otherwise a company would stay in the state hands. However, when we have a possi-bility
to choose between privatization methods, it seems that the choice of the one that prom-ises
better corporate governance solutions and higher microeconomic efficiency is advisable.
Choosing more “feasible” but lest “efficient” method would cost us loosing opportunities for
fast and deep restructuring of a company, rapid improvement in its performance. It simply
means lost time that is used by other companies for improvement of their competitiveness.
Besides, it hampers the development of markets by postponing the introduction of efficient
market attitudes. It should be stressed that during the transition an enterprise plays a dual
role being not only an object of some reforming efforts of the government, but also playing a
role of an active co-creator of market attitudes and relationships. In other words, enterprises
to a large extent create environment in which they operate and there would be no market
without actors who play according to the market rules. And, last but not least, it hampers the
growth of the national economy.
Another problem lays in the false character of many “feasibility vs. efficiency” dilemmas,
because following the “feasibility” path (that e.g. favored some social groups in order to gain
their support for the reforms and/or overcome their resistance to changes) often proved to be
counterproductive. In a longer perspective, instead of unblocking and/or accelerating the pro-market
reforms, it created special interest groups that caused reform slowdown and numer-ous
31
dysfunctions and pathologies.
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